Consumer Credit Collapsing - September 2009

As I said in a previous post – in a sane world with a sane monetary system – consumer debt reduction would be a good thing. Unfortunately, we live within an insane monetary system where our money is created from debt. Our debt must continue to grow exponentially for the system to function. Couple this with the fact that 70% of our economy is driven by consumer spending (which is rapidly declining) – and we’ve got a perfect storm for a debt based monetary system.

We are experiencing the collapse of exponential growth curves (debt, money supply). Things will really begin to deteriorate when we see a major shock to the system – most likely a stock market crash. When this happens, what little confidence that remains in the system – will vanish. Then the entire system will begin a ‘free-fall’ collapse – stocks & bonds will continue to rapidly decline in value, interest rates will increase significantly, the value of the U.S. dollar will plummet, derivatives will become worthless, bank failures will increase dramatically possibly leading to a bank holiday, etc.

We hear our financial (Federal Reserve and economists) and political leaders tell us that our economy is ‘stabilizing’ and that we will return to ‘growth’. What is the truth? The truth is that for our economy to return to ‘growth’ – we will need to once again create approximately $4 trillion in debt each year (current aggregate amount of interest on our outstanding debt). Currently, we are no where near this amount – and with our current levels of debt – there’s no way that I can see for us to return to this level of debt creation.

Remember – even if we could create $4 trillion in debt over the next year - our debt must grow exponentially. For our economy to continue to grow and prevent a collapse – debt creation in coming years will need to continue to grow - $5 trillion, $6 trillion, $7 trillion. You see the problem. The current government stimulus packages are only prolonging the inevitable collapse of this system. Our government can continue to implement new stimulus packages – but eventually we all go bankrupt – including our government.

We have reached the end of the line. We’ve been climbing the steep incline of an exponential curve – and now we’re falling. There is no way for us to return to ‘growth’ unless this system changes. Of course, world leaders have a new system waiting for us. Once we begin a ‘free-fall’ collapse – we’ll see the ‘solution’ quickly appear.

jg – September 8, 2009
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From Nathan’s Economic Edge (www.economicedge.com):

Tuesday, September 8, 2009

Consumer Credit Deflating…

While the whole world of “economic experts” are talking about and bracing for inflation, consumer credit (credit being the largest part of the money supply) is CONTRACTING at a RECORD PACE.

That’s what exponential curves do when they have peaked. The math does not allow anything to grow unabated year after year into infinity, that only occurs in the minds of idiot politicians and poorly trained economists who received their education in the land of fiat – America.

Here’s the data according to Econoday... the experts consensus was for a contraction of $4.1 billion, actual contraction was $21.6 billion for July:

Highlights


Contraction in consumer credit reflects rising consumer caution as well as banking efforts to limit lending exposure. Consumer credit contracted $21.6 billion in July, a very severe reading and the largest on record. At $15.5 billion, June's contraction was also severe ($10.3 billion initially reported). July's contraction is the sixth in a row for the longest streak since the credit squeeze of 1991. Nonrevolving credit led the decline, at minus $15.4 billion in a surprise given cash-for-clunkers which kicked off late that month. It would be a big surprise if there was another deep contraction in non-revolving during August. Revolving credit in July fell $6.1 billion. The markets may ignore this report but policy makers won't as it works directly against their efforts to stimulate spending.

So, even with Cash for Clunkers the contraction was the largest on record! What will it be without?

I’ve been warning that we are on the verge of a deflationary spiral, the data keeps coming in to support that view. Below are the latest graphs from the St. Louis Fed. Year over Year numbers below zero mean the supply of credit is shrinking:

Total loans and leases at commercial banks – negative yoy, the most since 1976:

Total Revolving credit outstanding – negative yoy, the most ever recorded by the modern Fed:

Total Nonrevolving credit outstanding – negative yoy, the most since the early 90’s, I’m sure it would far surpass that if not for government loan programs provided by the likes of FNM, FRE, and the FHA:

Total consumer credit is contracting, and the rate of contraction is accelerating:

As far as derivatives of consumer debt… Securitized total consumer loans are falling at nearly a 10% pace year over year:

Sure the government is going to create inflation, right up to the point that all confidence in our currency is lost. Today they auctioned off tens of billions more in public debt. The supposed bid to covers were high, but they were FAKE BIDS made by the Primary Dealers who are buying up the debt and then selling it right back to Uncle Sugar. The game is not enough, the money they create cannot go into the economy because the economy is saturated with debt and all new money simply goes to pay it down. It’s a game that is going to end in tears, and already has for millions of unemployed and their families.

Today’s action took the dollar’s daily chart right to the bottom of a descending wedge formation:

If that normally bullish formation breaks down, it’s likely to be violent and you can see that the next support can be found all the way back down in the 71 area on the weekly chart: